Michael B. Duff

There are a lot of libertarian pessimists out there today. It looks like debt-based government expansion has reached its inevitable end, but nobody can say when we’ll have our Berlin Wall moment.

It may still be 10 years away. But everything is so connected now. Financial markets change literally within milliseconds. So when that Berlin Wall moment happens, the reaction will be that much more dramatic.

It’s the drama that scares me — the possibility of social unrest and civil disorder. Germany and Great Britain are making noises about austerity, but they’re basically just pledging to spend 36% more than they take in instead of the usual 40%.

The unfunded liabilities, in terms of pensions, health care and welfare programs are so huge we can’t even comprehend them. And instead of dealing with the problem honestly, our politicians have abdicated their responsibility.

The California legislature can’t even pass a budget right now. The U.S. congress is about to do the same. There are no easy places to cut these budgets. There’s lots of easy pork, but even if you cut every dime of it, it wouldn’t be enough to make a dent.

The only expenditures big enough to matter are left in “untouchable” programs. Every cut will require a big courageous policy decision. If you want to cut enough defense spending to matter, you’ve got to take a stand on Afghanistan and the Iraq war. You’ve got to stand up in front of the American people and say, “We can’t afford this anymore.” Or you have to pretend it’s for foreign policy reasons and reverse 10 years of Neocon rhetoric.

This debt crisis is happening on every level. Every state government, every city government and every part of our Federal government is in the red. Illinois is even worse than California and even less willing to deal with it.

We’ve got some very hard choices coming; choices that will require decisive action from politicians who are willing to take risks. But the job of governing has been so easy for so long, our current crop of politicians does not have what it takes to make those choices.

For decades all they’ve had to do is get elected and spend from an infinite supply of government credit. The money was so easy, Republicans abdicated their symbolic pose as guardians of government spending and started competing with Democrats to see who could run up the biggest deficit.

Spending money for votes is relatively easy. For decades the primary job of a U.S. congressman has been to quietly collect bribes from special interests and convince voters they were still on their side.

The choices facing our political class now are an order of magnitude harder than what they’re used to dealing with. I could almost feel sorry for Obama, if he hadn’t ridden into town promising to solve every problem with government money.

We’re dealing with decades of malinvestment here. Cheap money and government bailouts have led people to take risks that they never would have taken in a “normal” economic climate.

Now all those bad investments are collapsing, all at once. All the projects that started in a climate of easy money, based on the assumption of cheap credit forever are starting to collapse.

The banks are hiding trillions in bad loans that we haven’t even talked about yet. We desperately need a recession. All these companies that made bad decisions need to fail and go bankrupt, so the labor and capital they have can be redirected to enterprises that will actually be sustainable in the long run.

But every politician in Washington, every pundit on the national news, and every crooked banker on Wall Street wants to keep the easy money coming, so they can line their own pockets and shift their losses to some other sucker before that Berlin Wall of Debt comes down.

This isn’t just a matter of greed and corruption. Economists, politicians and power brokers all over the world have built their reputations on the idea that governments can spend forever, that all spending is “good” and that we can borrow forever without paying it back.

Paul Krugman won’t be the only Nobel Prize winner caught with his pants down when this bubble pops.

So yeah, I’m a pessimist. But there’s a bigger picture than the one I usually look at, and there are actually a few libertarian optimists out there, smart enough to give me hope.

Here a couple choice quotes from libertarian optimist Greg Swann.

First, a warning, and an eloquent statement of the problem:

Governments destroy wealth best with wars, but they destroy wealth with almost everything they do. Anything that a government does that makes it harder for an honest trader to either produce, purchase or sell a marketable good or service is a net destruction of wealth. Money is not wealth, but money is the seed stock of new wealth, so, by despoiling the currency, by taxing productivity, and by rewarding stupidity, waste and sloth at the expense of wisdom, thrift and enterprise, governments systemically destroy wealth. This is all painfully obvious — by which I mean, the less obvious is it to you, the greater your pain.

Now the good news:

The productive capacity of the world has not changed. If anything, it continues to go up, even if perhaps at a temporarily slower pace. Wealth is not money. Wealth is goods and the intellect and husbandry and manufacturing capacity to produce more goods. Every bit of the real wealth we had yesterday, we have today. A lot of people have lost a lot of money, but our store of produced goods and our fixed capital base for producing more goods is undiminished.

Do you understand? If there had been a war, and if some significant fraction of the world’s capacity for producing goods and services had been destroyed, that would be a very bad thing. That would be a cause, going forward, for concerns about systemic poverty.

This hasn’t happened. We are richer today than we have ever been, expressed in terms of our ability to produce goods and services, and — because of the spread of data-processing, because of the enterprise of the Chinese, and because of the intellectual renaissance in India — we will be quite a bit richer — by those same standards — as soon as tomorrow. I mean that literally: Tomorrow.

I don’t necessarily share Greg’s optimism about the economic value of data processing or the educational value of people reading random stuff on the Internet. I don’t think the average person has been studying manufacturing techniques and engineering blueprints.

But once reality sets in and changes the reward structure, information technology will make it much easier for us to adapt. I think we’re going to see a lot of people grabbing cheap online degrees in the next few years, struggling to start 2nd, 3rd, or 4th careers when their pensions are cut off.

I particularly like what Greg said about the nature of real wealth. There hasn’t been a war (yet). Our population is smart, literate and healthy, more or less. Technology has given us a much more efficient baseline to start from and the buildings are still standing.

America has been on the wrong track for a long time, but once we have our moment of clarity, the turnaround should be very fast.

But when will that moment come, when every government, every bank, every school, and every media voice is working to delay it?

I’m confident that we can bounce back, but the longer we wait, the harder the fall will be. And if we fall too hard, we could trigger a breakdown of civil order and destroy the framework we need to rebuild.

Hopefully the Wall will fall in Europe first, and give us time to wake up.